This year, power is getting political. Here’s why you should care

Steve O’Connor CEO of Flick Electric writes about why he welcomes increased scrutiny for his industry.

We’re not about political party flag-waving here at Flick – that’s not our mandate. What we are interested in is how political shifts and policy levers impact our customers, and Kiwi electricity users in general. So, all of us. Because that’s the thing about power – the lightbulb kind and the political kind – it really is about all of us.

You may have heard about the Electricity Price Review that’s underway. If not, here’s the rundown: the Government announced an Electricity Price Review in February this year. The eight-person panel is tasked with investigating whether the electricity market as a whole is delivering reliable power at a fair and equitable price to consumers, alongside some questions about environmental sustainability, the shift to renewable energy, and the impact of innovations in technology.

MBIE research shows that New Zealand households now pay 79% more for power than they did in 1990, compared with 24% less for commercial businesses and only 18% more for industrial users. This increase is for a trio of reasons: distribution charges (the cost of moving power around) shifted from businesses to households; generation and retailing related charges have increased a lot; GST went up from 10% to 15%.

Although there is an argument to be made that wages have also risen in this time, this shields the very real – and very deeply felt – impact of income disparity and energy poverty. If consumers are saying they’re hurting, they are – no matter how the relative statistics are interpreted.

In one large University of Otago study nearly 20% of people reported that they have gone without heating because they felt unable to afford it. That means that thousands of New Zealanders feel they have to choose between feeding their kids and heating their home.

This choice plays out in an equally damning statistic: every winter, more than 25,000 Kiwi children are hospitalised with respiratory infections and illnesses caused by living in cold, damp houses. Health data shows that such illnesses are the third leading cause of death in this country.

This is simply unacceptable.

While there are a number of contributors to energy poverty, including a pretty shoddy housing stock, that doesn’t mean we can shy away from the part that electricity prices play. It is an unavoidable truth that the mechanics of retail competition in the electricity industry impact our daily lives and the well-being of our families. That’s where the review comes in.

The Initial Report

A review announced in the first term of a new government can lead to a certain amount of scepticism about whether it is more to do with politics than a genuine appetite for reform. Overseas experience shows that such reviews can go beyond political outcome, however.

For example, the wide-scale review into electricity prices recently completed in the UK has resulted in very real, and very quick, legislative change.

And if the initial report published by the review panel is anything to go by, the industry needs to take a hard look in the mirror, because the status quo’s initial report card is out, and it has been found wanting. It earned a ‘Must Try Harder’ on both affordability and fair pricing. Here’s why.

The review panel’s findings parallel the experience in the UK: we have a two-track market that disadvantages the most loyal customers. The approximate 21% of Kiwi customers who are very engaged – the households which switched power companies over the past year – are benefiting from competitive prices as large retailers and new market entrants compete for their dollar. Meanwhile, the remaining majority of customers – including that 42% of households who have never switched providers – find themselves propping up the industry’s profit model on a tariff that rarely changes (except to increase).

Similar too is the socio-economic profile of these consumer groups. The households least able to afford higher tariffs are also less likely to switch both in the UK and here, where a 2014 Electricity Authority UMR New Zealand report showed that those on very low household incomes ($20,000 or less) are less likely than other households to shop around for the best power deal.

The MBIE panel also observed a concern raised by a consumer group: so-called ‘prompt payment discounts’, which can be as high as 26% of a bill, are in fact more accurately characterised as punitive late-payment penalties for those who are most likely to miss a bill payment (the most vulnerable in our society, in other words). Far from being a reasonable late payment fee, they have become a profit-making mechanism that obscures the fact that not all customers are on the best possible rate in the first place. What’s more, they simply don’t reflect the cost to retailers of a bill being a day or two late. Hearteningly, Meridian recently announced that they will abolish prompt payment discounts. By their own admission, this will cost them $5m – that’s millions of dollars that will go back into the hands of Kiwis.

Electricity power pylons stand in Rangipo Desert near the State Highway 1 Desert Road on May 6, 2016 in Waiouru, (Photo by Hagen Hopkins)

Where to from here?

There are weighty issues to be addressed. However, the overall picture is not all doom and gloom.

We have a reliable electricity system and future-facing market, with over 80% renewables and an ability to act more nimbly than many comparable countries, including the UK. Our set-up and low barriers to entry mean that we have innovative models in the market here – like Flick and other smaller, independent retailers – that just wouldn’t exist in many other places. We’re also one of the few markets in the world where smart meters, which provide some great consumer benefits, were rolled out without a regulatory mandate in 2005.

What is clear is that we have two distinct needs moving forward. We need to change the rules of the market to favour consumers so households aren’t bearing the strain of any structural or market inefficiencies or unfair retail behaviours. We also need to incorporate more renewables to hit our zero emissions targets and do this in the most cost-effective way possible.

As a retailer, our primary concern is with the first. Tweaking the market’s design and rules could significantly reduce the cost of energy by eliminating the opportunity for large, incumbent players to price discriminate – so everyone is on the best deal. A more favourable market could also be created by using real-time prices to maximum benefit, which relies on consumers, network companies and generators all becoming more responsive. Why? Because when consumers understand more about the dynamics of supply and demand, they can make choices that work better for their back pocket and for the natural environment.

Having a better understanding of how the market works also provides the opportunity for the consumer voice to be amplified during the conversations created during moments such as this review – because it’s impossible to take part in a discussion when you have never been given the opportunity to understand its terms.

The final piece of the puzzle is the competitive environment required if we’re to truly live up to our world-leading reputation – the market needs to be a level playing field for all participants. The initial report has found that the so-called gentailers, the companies that are both generators and retailers (Meridian Energy, Contact Energy, Mercury, Genesis Energy and TrustPower), have some serious market power when supply is tight. The report also noted concerns about systematic discounting to commercial and industrial customers at a price which suggests the market is tilted in favour of the gentailers.

This is where the Electricity Authority could take a more active role in ‘policing’ the market for the benefit of consumers by making the wholesale market and hedge market activity more transparent, and by asking hard and open questions of generators when economic supply is held back.

We would find it completely unacceptable for Fonterra to charge $100 per bottle of milk with little to no transparency about the market conditions that created such high prices. Similarly, it’s necessary for generators and the Electricity Authority to ensure that Kiwis aren’t paying the price of market power and opportunism at the light switch.

But, first – you get your say

Between now and when the final report comes out next year, both the industry and the public get to comment on what the panel has found. We strongly encourage people to have their say.

Like all retailers, Flick has and will continue to be under the microscope until February. We welcome that. Why? Because we think the review is an opportunity for the current structure of the electricity market to be investigated to the benefit of consumers.

As a company, we want Kiwis to value – really value – their power. After all, electricity lights up our lives. It helps us warm and feed our families, do business, and, increasingly, get around. For this to happen, customers have to be at the centre of everything we do as retailers. It may sound like common sense, but with a status quo that has been dominated by profit models aligned with generation, it has been all too easy to claim social responsibility while gouging loyal customers.

But, customers can no longer be viewed as props for a model that generates its profit upstream – they must be viewed as our partners. That’s the only way that we can facilitate the true consumer/market participation that tech is making possible, and that Kiwis are increasingly demanding.

We encourage this in the hope that next time our industry report cards are in, fair pricing and affordability will receive straight A’s.

General enquiries about the Electricity Price Review can be sent to: energymarkets@mbie.govt.nz

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